Negative investor sentiment towards troubled EMEA Banks

Prior reading of securities lending tea leaves tells us that sophisticated investors are an early warning system of impending country bail outs. They sell their bank holdings listed in that country if they already own any or go short. We have run the rule on 200 European banks to see investor sentiment as we head towards another round of EU stress testing after Portugal officially asked the EU for help. The bottom line is that funds continue to predict worse times ahead for many of Europe’s banks and that there should definitely be two “I’s” in PIIGS.

Last year, we flagged rising short selling and falling institutional ownership in National Bank of Greece, Piraeus Bank and Allied Irish Bank. More recently, we flagged up rising and high demand to borrow in Banco Espirito Santo and Banco Comercial Portugues, and rising stock on loan in some Italian banks.

Yesterday the FT reviewed the academic debate at our London Forum and suggested that the industry finds an “ethical” side to short selling to counteract the critics. It is therefore brave to flag up short selling in European banks. Yet we can point out that most of the companies cited below have been subject to negative investor sentiment for years not weeks and that this state of play is as much about long only funds selling as shorting.

To understand recent investor behavior we have looked at the two week change in sentiment across 200 European banks (using our Portfolio Dashboard). Sentiment is broadly neutral towards most, but where the long only funds and short sellers agree is that there are two thirds more negative bets as positive. The PIGS countries dominate the top 10 banks showing rising short selling and falling institutional ownership, but only when the “I” stands for Italy and not Ireland. In fact there are 4 Italian banks on the list.

Banca Monte Dei Paschi Di Siena (BIT:BMPS) possesses the largest amount of directional short selling at 7% of total shares outstanding on loan. There is a combination of short selling and dividend motivated borrowing in Banca Carige Societa Per Azioni (BIT:CRG) amongst the 4% of its shares on loan. Banca Popolare Di Milano (BIT:PMI) has seen demand to borrow at a substantial 20% of the company, but this has much to do with a 3.58% dividend yield in late May. The 7% of Unione Di Banche Italiane’s (BIT:UBI) shares on loan are also part dividend and part directional shorting with this aspect trebling since August.

Two Greek names top the negative sentiment list due to recently falling institutional ownership, namely Agricultural Bank of Greece (ATH:ATE) and TT Hellenic Postbank (ATH:TT). There is only one Spanish bank featured and this is Banco Pastor. The absolute level of short selling is low, but the last 14 days bear witness to a 20% increase in demand to borrow and a 1% fall in institutional ownership.

Spanish banks dominate the list of European banks with the most crowded short positions. The names here (Banco de Valencia (MCE:BVA) and Bankinter (MCE:BKT) are little changed on the last year or two. Portugal’s Banco Espirito Santo (ELI:BES) and Banco Comercial Portugues (ELI:BCP) remain on the list. Commerzbank (ETR:CBK) also features with most of the supply being borrowed.

On the flipside, investors are positive towards Danish, French and Russian banks with Sydbank (CPH:SYDB), Societe Generale (EPA:GLE) and JSC VTB (LSE:VTBR) dominating the list of positive sentiment with institutions buying them, and low or falling short interest.

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